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Jackson's Autos (JA) is evaluating a capital budgeting project that costs $565,000. The project will generate...

Jackson's Autos (JA) is evaluating a capital budgeting project that costs $565,000. The project will generate $100,000 per year for the next 10 years. JA's required rate of return is 11 percent. What is the project's internal rate of return (IRR)?

a. 5.9%

b. 17.7%

c. 11.0%

d. none of the above

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Answer #1
Internal rate of return (IRR) is the discount rate for which the net present value(NPV) of the investment is zero.
Use the financial formulas function in excel to calculate the IRR.
The IRR is 12.00096%.
Using the IRR as the discount rate, calculate the NPV and if it is zero then that is the IRR.
Present Value = Future value/ ((1+r)^t)
where r is the interest rate that is 12.00096% and t is the time period in years.
Net present value (NPV) = initial investment + sum of present values of future cash flows.
Year 0 1 2 3 4 5 6 7 8 9 10
cash flow -565000 100000 100000 100000 100000 100000 100000 100000 100000 100000 100000
present value 89284.95 79718.02 71176.19 63549.62 56740.24 50660.49 45232.2 40385.54 36058.21 32194.55
NPV 0
IRR 12.00096%
d. none of the above
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